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JCIT v S.I. Property Development Limited

Income Tax Appellate Tribunal

CHENNAI

24 February 2006

It Appeal Nos. 865 and 1842 (Mad.) of 1999 [Assessment Year 1996-97]

The Judgment was delivered by : CHANDRA POOJARI (ACCOUNTANT MEMBER)

This appeal by the revenue as well as the assessee are directed against different orders of the CIT (Appeals). The revenue in its appeal has taken the ground that the CIT (Appeals) has erred in cancelling the additional tax levied by the Assessing Officer by revising the intimation sent under section 143(1)(a) of the Income-tax Act.

2. The brief facts of the case are that the assessee has declared an income of Rs. 1, 70, 65, 220 in its return of income and claimed deduction of Rs. 7, 47, 464 on account of share issue expenses. This return of income was processed under section 143(1)(a) of the Act on 27-3-1997. While processing the return, the Assessing Officer has disallowed an amount of Rs. 2, 73, 765. Subsequently, the Assessing Officer came to know that consequent upon the judgment of Hon’ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT[1997] 225 ITR 798 delivered on 27-2-1997, the assessee is not entitled for deduction of share expenses as revenue expenditure and such expense should be treated as capital expenditure. Accordingly, the Assessing Officer issued notice for rectification under section 154 of the Act on 3-8-1998 and the order under section 154 was passed on 24-11-1998, disallowing the above expenditure, after giving opportunity of hearing to the assessee. Aggrieved, the assessee went in appeal before the CIT (Appeals), who has allowed the appeal of the Assessee holding that the issue is a debatable one and whether the said expenditure falls under the purview of section 35D or not is to be decided. The revenue being aggrieved, filed this appeal before us.

3. None appeared on behalf of the assessee despite issue of notice of hearing. However, the Official Liquidator vide his letter on record requested the Tribunal to decide the issue on merit. Accordingly, we proceed to decide the issue on merit after hearing the learned Departmental Representative.

4. The learned Departmental Representative submitted that the CIT (Appeals) ought to have appreciated the wrong mention of section would not render rectification made by the Assessing Officer under section 154 or the intimation sent under section 143(1)(a) of the Act. He ought to have appreciated that the decision of the Madras High Court in the case of Metro General Credits Ltd. v. CIT [1996] 221 ITR 99 following the decision of the Hon’ble Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, supporting the stand of the Assessing Officer was rendered on 27-9-1995, i.e., before the due date for filing the return of income.

5. After hearing the learned Departmental Representative and perusing the records, we are of the opinion that the share issue expenses should be treated as capital expenditure as held by the Hon’ble Supreme Court in the case of Brooke Bond India. Ltd. (supra) which was delivered on 27-2-1997 and the Assessing Officer is justified in disallowing this expenditure since at the time of issue of notice this issue stood settled against the assessee. Accordingly, we reverse the order of the CIT (Appeals) and restore that of the Assessing Officer in this regard.

6. The assessee in its appeal has raised the same issue that the CIT (Appeals) has erred in disallowing the share issue expenses which falls under the purview of section 35D of the Act. As we have held that the share issue expenses should be treated as capital expenditure as laid down by the Hon’ble Supreme Court, we reject the ground taken by the assessee.

7. In the result, the appeal filed by the revenue is allowed and the appeal filed by the assessee is dismissed.

Per N.R.S. Ganesan, Judicial Member. – I have the benefit of going through the draft order prepared by my learned brother, the Accountant Member I am unable to subscribe myself to the reasoning and conclusion arrived by the learned Accountant Member. Therefore, I am constrained to write a separate and descending order.

2. Admittedly, the assessee-company was ordered to be wound up by the High Court and the Official Liquidator has been appointed as Liquidator of the assessee-company. Therefore, a notice of hearing was served on the Official Liquidator. The Official Liquidator by his letter dated 14-3-2005 has stated that the assessment year under consideration relates to pre-liquida-tion period of the assessee-company. He further stated that the erstwhile Directors of the company have not properly handed over the books of account and records of the company to the office of the Official Liquidator. The Official Liquidator further requested this Tribunal to dispose of the appeal on merit on the basis of the material available on record. Accordingly, we heard Mr. K. Srinivasan, the Departmental Representative (D.R.) and dispose of the appeal on merit.

I.T.A. No. 865/Mds./99 (Assessment Year 1996-97)

3. The facts of the case in this appeal are as follows:-

For the assessment year 1996-97, the assessee incurred an expenditure of Rs. 7, 47, 464 towards preliminary expenses for issue of shares. The total expenses was Rs. 47, 36, 953. The assessee by applying the provisions of section 35D claimed a deduction of 1/10th of the total expenditure at Rs. 4, 73, 695. The Assessing Officer while processing the return under section 143(1)(a) allowed the claim of the assessee and also issued intimation under section 143(1)(a). After issue of intimation, the Assessing Officer found that the expenditure incurred for issue of shares has to be treated as capital in nature in view of the judgment of the Supreme Court in the case of Brooke Bond India Ltd. (supra). Accordingly the Assessing Officer issued notice under section 154 for making a rectification in the intimation issued under section 143(1)(a). The assessee objected the proposed rectification. However, the Assessing Officer found that in view of the judgment of the Supreme Court in the case of Brooke Bond India Ltd. (supra), the expenditure has to be treated as capital in nature. Accordingly, he disallowed the claim of the assessee with respect to Rs. 4, 73, 695 by making an order under section 154. The assessee filed an appeal before the Commissioner of Income-tax (Appeals). The CIT(A) found that the Supreme Court in the case of Brooke Bond India Ltd. (supra) held that the expenditure incurred by the assessee for issuing shares has to be treated as capital expenditure. There is no doubt with regard to classification of expenditure as capital in nature. The CIT(A) found that the assessee is making a claim for deduction under section 35D, therefore, the issue involved in the proceeding under section 154 is debatable nature. Accordingly, the first Appellate authority found that the Assessing Officer was not justified to make a rectification in the intimation issued under section 143(1)(a). The Revenue has filed the appeal in I.T.A. No. 865/Mds./99 against this order of the CIT(A).

4. We heard Mr. K. Srinivasan, the learned D.R. The learned D.R. submitted that in view of the judgment of the Supreme Court in the case of Brooke Bond India Ltd. (supra) and also the judgment of the Madras High Court in the case of Metro General Credits Ltd. (supra), the expenditure has to be treated as capital in nature. The learned D.R. further submitted that as on 27-9-1995, on which the assessee has filed the return, the judgment of the Madras High Court in the case of Metro General Credits Ltd. (supra) was available. Therefore, the Assessing Officer has rightly rejected the claim by treating the same as capital in nature.

5. The argument of the D.R. has been carefully considered. The material available on record is also perused. I have carefully gone through the order of the CIT(A). The CIT(A) has reproduced the case of the assessee and also the submission made by the learned representative for the assessee before him. As reproduced by the first appellate authority, the case of the assessee is that the judgment of the Supreme Court in the case of Brooke Bond India Ltd. (supra) relates to the period when the provisions of section 35D was not introduced in the Income-tax Act. The assessee claimed before the CIT(A) that the expenses are to be treated as capital in nature since it relates to expansion of the assessee’s business or setting up of a new unit. Therefore, it is obvious that the assessee has not disputed the classification of the preliminary expenditure for issue of shares as capital expenditure. In fact, the assessee admits that it has to be classified only as capital expenditure. The revenue has filed the appeal before this Tribunal on the presumption that the CIT(A) has treated the expenditure as revenue in nature. This is misunderstanding of the order of the CIT(A). The CIT(A) found that the expenditure has to be classified as capital expenditure. However, since the expenditure was claimed in respect of expansion of the business in relation to setting up of a new unit, the deduction claimed under section 35D in respect of 1/10th of the expenditure has to be allowed. Therefore, the CIT(A) held that whether such expenditure should be allowed or not in the assessment year under consideration cannot be decided suo motu by the Assessing Officer. Accordingly, he observed that the issue arises in section 154 proceeding is a debatable point, therefore, the Assessing Officer was not justified in making a rectification.

6. I have also carefully gone through the judgment of the Supreme Court in the case of Brooke Bond India Ltd. (supra). The assessment year under consideration before the Supreme Court in the case of Brooke Bond India Ltd. (supra) is 1969-70 relevant to financial year ended on 30-6-1968. The Legislature inserted section 35D by the Taxation Laws (Amendment) Act, 1970 with effect from 1-4-1971. Therefore, section 35D may be applicable for the assessment year 1971-72 relevant to financial year 1970-71. Therefore, it is very clear that the Supreme Court has not considered the provisions of section 35D in the case of Brooke Bond India Ltd. (supra) What was decided by the Supreme Court is that the expenditure relating to issue of shares is a capital expenditure. As already observed, the assessee admits that the expenditure is capital in nature. Therefore, he is claiming 1 / 10th of the total expenditure as deduction under section 35D. In view of the above, it is very clear that the judgment of the Supreme Court in the case of Brooke Bond India Ltd. (supra) may not be relevant to the issue under consideration. In view of the above discussion, the issue involved before the Assessing Officer in the proceeding under section 154 is a debatable in nature, therefore, it cannot be disallowed by making a rectification under section 154 in the intimation issued under section 143(1)(a). Accordingly there is no infirmity in the order of the lower authorities. Therefore, the same is confirmed.

7. In the result, I.T.A. No. 865/Mds./99 is dismissed. I.T.A. No. 1842/Mds./99 (Assessment Year 1996-97)

8. This appeal of the assessee relates to assessment year 1996-97 against the regular assessment under section 143(3). The learned Accountant Member has followed his decision in I.T.A. No. 865/ Mds./99 which relates to disallowance under section 154 by making rectification of the intimation under section 143(1)(a). As I have discussed elaborately in the earlier part of the order while considering I.T.A. No. 865/Mds./99, the claim of the assessee is under section 35D. The assessee admits that the expenditure is capital in nature. The assessee claims that the expenditure was relating to expansion of the business in setting up a new industrial unit. Therefore, the lower authorities are expected to examine the issue in the light of the provisions of section 35D. The Assessing Officer has followed the judgment of the Supreme Court in the case of Brooke Bond India Ltd. (supra) for making the disallowance. However, he has not considered the claim of the assessee under section 35D. The first Appellate authority has simply confirmed the order of the Assessing Officer on the basis of the judgment of the Supreme Court in the case of Brooke Bond India Ltd. (supra). As elaborately discussed while considering the disallowance made under section 154 of the Income-tax Act, it is found that the judgment of the Apex Court in the case of Brooke Bond India Ltd. (supra) may not be applicable to the issue arises for consideration in this appeal. The assessee categorically makes a claim with regard to preliminary expenses under section 35D. Therefore, we have to examine whether the assessee is entitled to relief under section 35D. Since both the authorities below have not examined the applicability of provisions of section 35D with regard to claim made by the assessee, in my opinion, the matter has to be sent back to the Assessing Officer for examination with regard to applicability.

9. Accordingly, the orders of the lower authorities are set aside and the matter is remitted back to the file of the Assessing Officer. The Assessing Officer shall examine the applicability of section 35D with respect to claim of the assessee and thereafter decide the issue afresh in accordance with law.

10. In the result, the appeal of the assessee in I.T.A. No. 1842/ Mds./99 is allowed and the matter is remitted back to the file of the Assessing Officer as indicated above. However, there will be no order as to cost.

ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961

Since there is a difference of opinion, the following questions are framed and referred to Hon’ble President for nominating Third Member.

I.T.A. No. 865/Mds./99

(1) Whether in the facts and circumstances of the case, the claim of the assessee under section 35D of Income-tax Act can be disallowed in a proceeding under section 154, by making a rectification in the intimation issued under section 143(1)(a) when the issue is debatable in nature?

I.T.A. No. 1842/Mds./99

(2) Whether, in the facts and circumstances of the case, when the claim of the assessee under section 35D was not considered on merit by both the authorities below, the issue has to be remitted back to the file of the Assessing Officer for consideration of the claim of the assessee on merit under section 35D ?

We direct the registry to place the appeal files before the Hon’ble president for nominating a Third Member.

THIRD MEMBER ORDER

Per M.K. Chaturvedi, Vice-President.- These appeals came before me as a Third Member to express my opinion on the following questions:

I.T.A. No. 865/Mds./99:

“Whether in the facts and circumstances of the case the claim of the assessee under section 35D of Income-tax Act can be disallowed in a proceeding under section 154, by making a rectification in the intimation issued under section 143(1)(a) when the issue is debatable in nature ?”

2. I have heard the rival submissions. Assessee claimed expenditure under section 35D of the Income-tax Act, 1961. Assessing Officer while processing the return under section 143(1)(a) allowed the claim. Thereafter he resorted to the provisions of section 154 and held that the expenditure incurred on the issue of shares has to be treated as capital in nature in view of the judgment of the Hon’ble Supreme Court rendered in the case of Brooke Bond India Ltd. (supra).

3. The case of Brooke Bond India Ltd. (supra) is relatable to assessment year 1969-70. Section 35D was inserted by the Taxation Laws (Amendment) Act, 1970with effect from 1-4-1971. The Supreme Court had no occasion to consider the expenditure in the context of section 35D. Besides under section 35D assessee treats the expenditure as capital expenditure but because of the special provision 1/10th of the total expenditure was claimed. Such claim is not denied by the Apex Court in the case of Brooke Bond India Ltd. (supra).

4. Learned Judicial Member held that the case of the assessee is beyond the ken of the decision of Brooke Bond India Ltd. ‘s case (supra). Moreover, it is a debatable issue. Hon’ble Supreme Court has held that the expenditure incurred by a company in connection with issue of shares, with a view to increase its capital, is directly related to the expansion of the capital base of the company, and is capital expenditure, even though it may incidentally help in the business of the company and in the profit making. It was contended before the Hon’ble Supreme Court that where the enhancement was to have more working funds for the assessee to carry on its business and to earn more profit and that in such a case the expenditure that is incurred in connection with issuing of shares to increase the capital has to be treated as revenue expenditure. On this the Hon’ble Supreme Court has held that the statement of case sent by the Tribunal did not record the finding to the effect that the expansion of the capital was undertaken by the assessee for the purpose of meeting the need for more working funds for the assessee to carry on its business. From this it can be concluded that if the expansion of capital is in order to meet the need for more working funds, in that eventuality the expenditure could partake the nature of revenue expenditure. As such, Supreme Court’s decision cannot be directly applied over here. No apparent mistake has crept in the order on this count. Moreover, assessee admitted that the expenditure is of capital nature and the claim is only for 1/10th of the total expenditure as per the prescription of section 35D. As such it cannot be said to be mistake within the meaning of the Apex Court’s decision. I have perused the conflicting orders. I concur with the finding of the ld. Judicial Member on this count.

5. I.T.A. No. 1842/Mds./99:

“Whether, in the facts and circumstances of the case, when the claim of the assessee under section 35D was not considered on merit by both the authorities below, the issue has to be remitted back to the file of the Assessing Officer for consideration of the claim of the assessee on merit under section 35D ?”

6. I have heard the rival submissions. In this case the ld. Accountant Member followed his decision in I.T.A. No. 865/Mds./99 which relates to the disallowance under section 154. The assessee admitted that expenditure was of capital in nature. I have examined the necessary details. The claim was not made in respect of the entire expenditure. It was limited to 1/10th of the total expenditure only. It was alleged that the expenditure was relatable to expansion of business in setting up new industrial unit. Revenue authorities did not examine this issue in the context of the allowability of the claim under section 35D. Assessing Officer decided the issue by applying the decision of the Supreme Court rendered in the case of Brooke Bond India Ltd. (supra). CIT(A) confirmed the order of the Assessing Officer.

7. On examination of the fact it transpired that the decision in the case of Brooke Bond India Ltd. (supra) is not applicable in the facts of the present case. Apex Court was not concerned with the deduction under section 35D in the said decision. The ld. Judicial Member restored the issue to the file of Assessing Officer to examine the same de novo in the context of the provisions of section 35D since originally assessee made the claim under section 35D only. In my opinion, the view expressed by the ld. Judicial Member is correct. I concur with the same.

8. The matter will now go back to the regular Bench for deciding the appeals in accordance with the majority.

Per N.R.S. Ganesan, Judicial Member. – On a difference of opinion, the points of difference were referred to the Hon’ble Vice-President as Third Member. The Hon’ble Vice-President agreed with the view expressed by the Judicial Member. Accordingly the appeals were posted today for passing order in conformity with the majority opinion.

2. No one appeared for the assessee in spite of issue of notice. We heard the learned D.R. In conformity with the majority opinion, we hold that since the issue of deduction under section 35D is a debatable nature, it cannot be disallowed in a proceeding under section 154 of the Income-tax Act. Therefore, the order of the CIT(A) is confirmed and appeal of the revenue in I.T.A. No. 865/ Mds./99 stands dismissed. However, there will be no order as to costs.

3. Now coming to I.T.A. No. 1842/Mds./99, the Hon’ble Vice-President as a Third Member agreed with the view expressed by the Judicial Member. In conformity with the majority opinion, the judgment of the Supreme Court in the case of Brooke Bond India Ltd. (supra) is not applicable to the facts of the case. Therefore, the claim of the assessee under section 35D has to be examined on merit. Since the lower authorities have not examined the claim of the assessee under section 35D, the orders of the lower authorities are set aside and the matter is remitted back to the file of the Assessing Officer. The Assessing Officer shall examine the applicability of section 35D on merit in respect of the claim of the assessee and thereafter decide the issue afresh in accordance with law after giving reasonable opportunity to the assessee.

4. In the result, I.T.A. No. 1842 is allowed. However, there will be no order as to costs.